Emerging trends – Marine cargo insurance

Recently I had the pleasure of hosting a Marine webinar on behalf of my company: The theme — ‘ Emerging trends in marine cargo insurance’. The distinguished panelists, Mr. Sibesh Sen, EVP- Marine & Broker Relations from HDFC Ergo & Mr. Gurpreet Jolly, Head – Global Risk Management from Sun Pharmaceuticals Ltd drew from their rich experience as insurer & insured, even as I probed them as a broker.

There were in all six trends which we talked about, three of which are clearly visible and the other three set to come in, sooner than later. The presentation and the ensuing discussions centred around the Indian market, though many of these trends were reflections of what was happening in the developed insurance markets. A small brief on the six trends:

Increasing premium rates: Soft market cycles are over & cargo insurance prices have hardened all round the world. The prime reason for this is the adverse loss ratios thrown up by the cargo portfolio leading to Lloyds’ cracking the whip on many of its syndicates to shape up or stop underwriting this line of business. Quite a few of them have moved out of ‘new cargo’ business and hence capacities are shrinking. Other insurers/reinsurers have followed suit. In India too, prices have risen but not in tandem with international rates yet. The large risks with huge limits, specialized covers and most importantly, with adverse loss ratios do not find any reinsurance support in the international market. Some Indian insurers, displaying bravado are underwriting these risks to their net capacities now, but how long this can be sustained? Not for very long. The markets are recognizing good risks and risks where the insureds demonstrate serious intent to avoid/reduce losses.  The more, insureds spend ( time, money, effort) on Risk Management, lesser will be the impact on premium. Risk management is the key. Any insured is only as good as his risk is. Yes, there are certain challenges in India — given the increased premium on certain categories of industries under Property insurance, insureds who have a decent portfolio size seek reduction in marine cargo premium so that their overall outgo is controlled.  Many insurers are agreeing to this ‘portfolio approach’, but again, is this sustainable? Not for very long.

War & SRCC risks under Marine cargo policies – Notice of Cancellation

Following the world-wide decision of insurers/reinsurers to give Notice of cancellation on war & strikes risks in certain High-risk areas, GIC Re also followed suit. Cancellation of war & strikes risk is in respect of certain cargo carried in bulk coming from, going to, through or within the high-risk areas of the Persian Gulf, Gulf of Oman & adjoining waters. This Notice of cancellation is in respect of select commodities only viz. crude oil, petroleum products, chemicals & fertilizers. The war & strikes cover for such transits can be restored by paying additional premium @ 0.15% net.

Discussions centred round whether the cancellation notice could be extended to containerised cargo too, if tensions between the US & Iran increase. Alternately, if tensions are diffused will there be a case for rollback of war & strikes premium to original levels, which was practically  nil premium. It was felt that there had been a drop in war & strikes premium by more than 60% from 0.15%, despite no change in tensions prevailing in the Gulf region. Competition would eventually bring down the premium rate but yet , even the reduced premium will be many times more than what prevailed before the Notice of cancellation came into force.

Cargo Termination of storage in transit clause ( Amended) 

Discussions moved on to the total elimination of ‘intentional storage’ from marine cargo policies in India, courtesy the cited clause circulated by GIC Re. Mindless limits of storage & endless periods as well demanded by clients & intermediaries and readily given by underwriters ……….. there was a need to re-look for sure, but a total elimination was a knee-jerk reaction. The basic issue is with the lack of understanding at all levels about what ‘ordinary course of transit is’. Does elimination of intentional storage altogether present serious issues to clients? Reactions from panelists were mixed, ranging from not at all, to some extent, to a large extent. It was put forth that in the erstwhile Marine Cargo tariff there was a provision for covering additional storage (intentional) by paying additional premium on a weekly basis. There are situations like, exporters having to provide just-in-time deliveries to clients abroad, necessitating small limits of storage for a limited duration– something which is not possible now. Everyone was of the opinion that some flexibility needed to be brought in to address such requirements provided a reasonable price was paid for the intentional storage.

The next 3 trends presented were nebulous, possible trends in the very near future, starting early 2020:

The new Incoterms 2020 could present their own set of challenges which clients, insurers & brokers must be ready to face and find solutions. Even as we grapple with certain inconsistencies, as in Incoterms 2010 vs ICC-2009, the new Incoterms will be on us very soon. Some expectations are about a new Incoterm CNI, elimination of some prevailing Incoterms & sub-division of certain others & possibly FOB & CIF not applicable in case of containerised cargo. The very need for new Incoterms has arisen from the increased use of multi-modal transportation, cross-border e-commerce & increased digitization of documents. A very big responsibility of brokers will be to understand the new Incoterms ( as & when they come out) and guide their clients on changes in their contracts without impacting business but ensuring no gaps whatsoever. Insurers too would do well to understand the new Incoterms and the possible impacts they could have on insurable interest and claim settlements when looked at through a kaleidoscope of legislations across the world.

Will the new Insurance Act, 2015 in the UK replacing the ages-old Marine Insurance Act of 1906 be adopted in India too? When Relevance of the Marine Insurance Act itself is not understood by many, will India adopt the new legislation or at least draw from it, as this is found to be more in favour of the insureds. Important changes are that the duty of ‘disclosure of material facts’ cast on the insured is replaced by a ‘fair presentation’ of facts, which means insurers need to probe to elicit more information if needed: the draconian provision of a breach of any warranty, whether material to the loss or not allowing insurers to decline claims has been eliminated– breach of warranty can be remedied before the loss and even if not, liability cannot be denied by the insurer UNLESS the breach of warranty has actually caused the loss. There is also the provision of ‘ Contracting out’ of any of the Act provisions. This is available to both insurer and insured. However the fact and effect of contracting out of any of the Act provisions must be made known to all parties concerned. This could pave the way for differential policies being issued at differential prices. Panelists opined that if trade associations or other pressure-groups pushed for adoption of the new Act, the insurance industry should welcome it too.

The sixth trend which came up was IMO 2020-Impact on cargo insurance. This is a reality from January 2020. The International Maritime Organisation, in a bid to reduce air pollution has mandated that all ships should use fuel which contains not more than 0.5% sulphur content as opposed to the allowable limit of 3.5% now. The challenges — Refineries unable to produce VLSFO at short notice. Alternate fuel necessitates modifications in ships’engines which will be an added cost. Use of certain fuel which do not need engine modifications make for very high operating costs. If scrubbers are to be installed in ships, not only will it be an added cost but most yards are full and timely delivery of scrubber-fitted vessels before the deadline of 1st January 2020 looks difficult.

What is the connection with cargo insurance, one may ask. If a vessel is not IMO 2020 compliant, there could be a possibility of it being declared unseaworthy. If a vessel is unseaworthy and cargo is carried on board such a vessel, cover would not attach at all. Secondly, at a later date it is possible that a suitable clause for IMO 2020 may be attached to cargo policies laying down that if an assured knowingly ships cargo on board a non IMO 2020 compliant vessel, then the cargo insurer would be well within his right to decline claims, if any.

Interesting times ahead! A big positive emerging out of these trends is that marine cargo insurance is no longer considered a ‘commodity’ but a line of business which needs serious thinking be it for a underwriter, client or intermediary.